Labour can learn from a momentous day in social history

Henry Campbell-Bannerman resigned the office of Prime Minister on 3 April 1908. The succession was assured. Herbert Henry Asquith, the Chancellor of the Exchequer, travelled to Biarritz, where Edward VII was on a holiday that he would not interrupt, 'kissed hands' and received his seals of office. Later that day, he wrote to David Lloyd George with the offer of promotion from the Board of Trade to the Treasury. His letter contained 'one stipulation'. Because Budget day was only a month away, 'it would not be fair or even possible' for Lloyd George to make the Budget statement.

So it was Asquith who sounded the advance into the 'still unconquered territory of social reform'. He did not plan to push forward very far, but the long march had begun. By announcing that the government would introduce an old age pensions bill, he made 7 May 1908 the most momentous date in British social history, the day on which the welfare state was born.

The battle to rear the delicate infant illustrates lessons that any radical government would do well to learn. The Liberal administration of 1908 has much to teach the Labour government of 2008.

Asquith ended the pension announcement with the footnote that the Liberal party had fought 'the last election entirely unpledged on this matter'. There had been no pledge because there had been no agreement. Radicals, supported by the evidence of Charles Booth and Seebohm Rowntree, had argued for years that a state pension was the working man's only protection from poverty in old age. Joseph Chamberlain had championed the cause and become the hero of the young Lloyd George.

But his progressive zeal had not survived his conversion from Liberal to Unionist and no one of authority within the party picked up the fallen flag of reform. So the Liberal landslide in 1906 was not the radical dawn. The argument about pensions had become a dispute over technicalities - whether to finance the scheme through the insurance principle or pay the cost, year by year, out of current taxation.

Lloyd George thought all the questions easily answered. He claimed, without any supporting evidence, that the money could be raised from his favourite projects - land tax, death duties or the expropriation of tithes. It is a rule of progressive politics that necessary and feasible reforms are often postponed because opponents master the details while supporters rely on passionate assertions of principle.

A second rule is that reforms rarely result from altruism alone. Honourable intentions have to be supported by what Herbert Gladstone, the Liberal chief whip, speaking about women's suffrage, called 'the force majeure which activates and arms'. It was supplied in the campaign for old age pensions by the Trades Union Congress and its offspring, the Labour Representation Committee.

Because of the Taff Vale Judgment, which had emasculated trade unions by making them legally responsible for the consequences of their members' actions, more and more trade unionists were accepting the need for parliamentary representation.

Far-sighted Liberals, Lloyd George among them, warned that Labour could become a threat and should be made an ally. Their fears were increased when Labour won the Jarrow byelection. Worse still, an unapologetic socialist - the mysterious Victor Grayson - captured the nonconformist stronghold of Colne Valley. When the TUC unanimously carried a resolution which demanded the introduction of an old age pension on 1 January 1909, the government felt that it had no choice but to respond.

The government's proposals were more modest than the trade unions' scheme. The TUC had demanded five shillings (25p) a week for every man who reached 60 years of age. Asquith's scheme offered a pension to 75-year-olds and excluded vagrants, criminals, certified lunatics and anyone with an income of more than 10 shillings a week. Since it did not begin until the ninth month of the financial year, he only made provision for covering three months of the cost. The cabinet had agreed to an increased naval building programme for 1909-10.

The two commitments - pensions and dreadnoughts - left the new Chancellor to find £15m. The lack of foresight illustrated another rule of progressive government. Never announce a new spending programme without knowing where the money will come from.

The pension proposals survived, prospered and were extended because of a rule which applies to governments of all persuasions. 'Things are best done,' Mr Gladstone said, 'by those who believe in them.' Asquith had little sympathy for the elderly poor and even less for the trade unions. Lloyd George was no better disposed towards organised labour. Nor was he overburdened with either conscience or conviction. But poverty was his natural enemy and he believed that to defeat it, it was necessary to confound the greed of the rich and the cowardice of politicians. In his 1919 Budget, he paid for the pension by increasing income tax and introducing supertax. The virtual abandonment of his plan for land taxes did nothing to reconcile the rich to what they claimed was 'cunningly devised as a vehicle for the socialist revolution'.

Then Lloyd George went on to promote 'well thought-out schemes' to provide help 'for the sick, for the invalids, for the widowed and for orphans' and 'to deal on a comprehensive scale with the problem of unemployment'. He made no distinction between the deserving and undeserving poor.

On other questions, he was always ready to compromise, often sounding far more bellicose in public than his private moderation justified. But he took head-on his enemies in the war against poverty. Land owners were excoriated, the House of Lords demonised and his more timid colleagues brushed aside. And he demonstrated the most important of all political rules. Politicians cannot please all of the people all of the time. They do best when they decide which side they are on. The current Labour government's success - perhaps its survival - depends on it making that choice.

· Roy Hattersley's Borrowed Time: The Story of Britain Between the Wars is published by Little, Brown.